FedEx at Forty: At FedEx, Say Hello to the Next 40 Years

A major revamp reshapes the company, lays the foundation for how it does business in the twenty-first century, and bows to present and future realities.

By Mark B. Solomon

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SHAKEUP FOR THE EXPRESS UNIT

Not surprisingly, the impact of the corporate realignment will be felt most deeply at FedEx Express. Of the $1.7 billion in projected annual savings, $1.65 billion will come from the unit. It will consist of staff reductions through voluntary buyouts; a migration to newer, more fuel-efficient equipment such as Boeing 757 and 767 freighter aircraft and the replacement of thousands of older trucks with more modern vehicles; growth in its international business; and targeted expansion into industry verticals.

Perhaps most important will be a realignment of the FedEx Express network to better match package volume with flows. According to consultancy TranzAct Technologies Inc., two examples cited by FedEx management at the October meeting were the Houston area, where five stations were closed and replaced by two facilities, and the Atlanta area, where 2 million miles of driving were eliminated by consolidating more than 100 surface routes.

In an October 30th report, TranzAct said the overarching themes of the streamlining are “The Right Solution to the Right Customer at the Right Price” and “Getting the Right Packages Into the Right Network.” TranzAct said shippers should not see any decline in delivery standards given FedEx’s longstanding commitment to service quality. It advised them to work with FedEx to understand how they are perceived in the company’s eyes, what are the strong and weak operating characteristics of their traffic mix, and if they rank high in a “targeted” vertical in which FedEx is anxious to do business.

For FedEx, the profit payoff could be enormous. Though the air unit’s package growth is essentially flat — and barring a drastic improvement in U.S. and world economies, is likely to stay that way — the revenue per package, or “yield,” has still grown in the past two years by 11 percent to $15.46 per package, not including the company’s fuel surcharge. If FedEx hits its financial targets through the revamp, the resulting savings and efficiencies will take yields on its express product “through the roof,” said an industry official who asked for anonymity.

Some of the yield gains are the result of a controversial move in late 2010 by FedEx and UPS to adopt a dimensional-weight pricing scheme for shipments based on package density. Shippers whose packages fell outside the new dimensional parameters and who couldn’t reduce their shipments’ cubic dimensions to fit the revised guidelines were hit with rate increases that often ran into the double-digits.

In the October 10th presentation, FedEx said the revenue from the dimensional pricing changes “substantially exceeded our expectations” during the 2011 calendar year. It is believed that FedEx has generated at least $100 million in additional revenue from those changes alone.

In an environment where express package volume isn’t growing but the value of each package is, air express shippers will become coveted prospects, said TranzAct. “Whatever the reason for [FedEx] Express’ decline — conversion to electronic transmission [for documents], cyclical service downgrades to save money in difficult economic times, a marketplace that is reaching maturity — today’s premium air-express shipper is going to be a strongly desired client by any carrier,” the firm’s analysts wrote.

The industry official went one step further, saying air shippers tendering shipments traveling less than 300 miles will be like liquid gold for parcel carriers. That’s because those shipments could easily be diverted to truck and still be delivered the next day to meet the air service delivery commitments. FedEx — or UPS, for that matter — can charge higher air rates and capture the huge differential between the cost and price of the service, the official said.

FedEx has boasted that its ground deliveries are faster than UPS over about one-fourth of U.S. lanes served by both companies. The official said that claim understates FedEx Ground’s speed advantage. “I’ve been in this business a long time, and I’ve never seen anything like it,” the official said, referring to FedEx Ground’s time to market.

As an example, the official cited the unit’s ability to deliver ground packages from Dallas to virtually the entire United States within three days, and to some closer-in markets within one or two. “This type of transit time improvement through probably not of the same degree — is also true from other U.S. origins,” the official said.

SOMETHING OLD ...

All of this is a far cry from the mid-1990s, when FedEx hitched its wagon almost exclusively to the airplane. Around that time, Smith told an industry conference that, “To us, [truck] is a four-letter word.” A company spokesman, asked years before FedEx expanded into the ground parcel business if that scenario was feasible, replied, “We see no need for a slower service.”

A move into supply chain management services also seemed anathema to FedEx, even as UPS was growing its presence in the segment. As FedEx saw it, transportation particularly air transportation — was where the profits were. Supply chain management services generated decent revenue but had relatively thin margins, it reasoned.

By the late 1990s, however, actions began speaking louder than words. With the Caliber acquisition came Roberts Express, which gave FedEx an entry into the time-critical delivery market, and Viking Freight, a regional LTL carrier serving the Western United States. Three years later, FedEx bought LTL carrier Arkansas Freightways, whose Eastern U.S. operations were then combined with Viking’s to create a national system.

FedEx even rebranded itself and took a new corporate name, changing from “Federal Express Corp.” to “FedEx Corp.” to position itself as more than just an express provider.
Now, as the company enters its next 40 years and Smith begins to think about his legacy, the focus will be on profitable growth, and a changed business model. “It’s not about just taking share anymore,” the official said.

This story originally appeared on-line at dcvelocity.com on November 13, 2012. Those seeking more information about DC Velocity can contact the publisher at agilebusinessmedia.com/am/about.php. Reprinted with permission.